The Senior Citizens League (TSCL), a nonprofit advocacy group, expects Social Security benefits to get a 2.6% cost-of-living adjustment (COLA) in 2025. That would mark the first time since 2021 that retirees have received a COLA under 3% . It could also be the first time since 2021 that Social Security benefits have lost buying power in two consecutive years.
That is concerning because the 2024 Retirement Confidence Survey from the Employee Benefit Research Institute found that many retired workers are already struggling to make ends meet.
- 26% of retired Americans don't think they have enough money to live comfortably throughout retirement, and inflation is a top reason for their lack of confidence.
- 56% of retired Americans are concerned they will need to make substantial spending cuts to keep pace with inflation.
Those statistics corroborate the idea that Social Security lost buying power this year. Indeed, TSCL says benefits have lost 20% of their buying power since 2010, which makes the possibility of another too-small COLA in 2025 especially troublesome. Read on to learn more.
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Some experts think Social Security's COLAs should be calculated differently
Social Security's cost-of-living adjustments (COLAs) are based on a subset of the Consumer Price Index known as the CPI-W. Specifically, the average CPI-W reading from the third quarter of the current year (July through September) is divided by the average CPI-W reading from the third quarter of the previous year. The percent increase becomes the COLA in the following year.
However, the CPI-W measures inflation based on the spending patterns of hourly workers. Some experts see that as a problem because workers spend money differently than retired workers on Social Security. Those experts recommend fixing the problem by replacing the CPI-W with another subset of the Consumer Price Index known as the CPI-E.
"The CPI-W is based on spending patterns by workers. By definition, Social Security recipients aren't working -- so that's the disconnect," said Richard Johnson, senior fellow at the Urban Institute. "The CPI-E better reflects the changes in prices that older adults face."
The CPI-E measures inflation based on the spending patterns of individuals aged 62 and older. It puts more emphasis on spending categories like housing expenses and medical care, and less emphasis on spending categories like education and transportation. In that sense, the CPI-E better aligns with the spending profile of the average retired worker.
The Social Security COLA in 2025 is on pace to do something it hasn't done since 2021
CPI-E inflation is currently three-tenths of a percentage point ahead of CPI-W inflation in 2024. If that trend persists through the third-quarter, it will be the second consecutive year in which third-quarter CPI-E inflation outpaces third-quarter CPI-W inflation.
So what? Assuming the CPI-E is a better gauge of pricing pressure on Social Security recipients, the 2025 COLA is on pace to underestimate true inflation for the second consecutive year. That hasn't happened since 2020 and 2021, as shown in the chart below.
Year | Hypothetical COLA (CPI-E) | Actual COLA (CPI-W) | Difference (CPI-E Minus CPI-W) |
|---|
2020 | 1.9% | 1.6% | 0.3% |
2021 | 1.4% | 1.3% | 0.1% |
2022 | 4.8% | 5.9% | (1.1%) |
2023 | 8% | 8.7% | (0.7%) |
2024 | 4% | 3.2% | 0.8% |
Data source: Social Security Administration. The chart shows the hypothetical COLA based on CPI-E inflation and the actual COLA based on CPI-W inflation.
As a shown above, Social Security recipients would have gotten larger raises in 2020 and 2021 had the COLAs been based on CPI-E inflation. That was the last time the hypothetical CPI-E COLA exceeded the actual CPI-W COLA for two consecutive years. But retirees will likely find themselves in that position again in 2025.
What does that mean? If the CPI-E is truly a better measure of inflation for Social Security recipients, then benefits lose buying power whenever CPI-E inflation exceeds CPI-W inflation. That means Social Security benefits are on pace to lose buying power for the second year in a row in 2025, which is bad news for recipients already struggling to make ends meet.
How retirees struggling to make ends meet can cope with inflation
There are two ways retirees struggling with inflation can reduce their financial burden immediately. They can either cut costs by eliminating certain discretionary purchases from their budgets, or they can increase income through part-time employment and/or taking bigger withdrawals from investment accounts.
To elaborate, most retirees have two types of income: fixed and variable. Fixed income sources include Social Security and pensions, while variable income sources include investment and savings accounts. Retirees can add a third income stream by working part time. Financial advisors often recommend turning a hobby into a part-time job.
Additionally, retirees can supplement their income by moving cash to a high-yield savings account . Now is a good time to make that decision because interest rates are at their highest level in decades. Retirees can also supplement their income by taking above-average withdrawals from 401(k)s , IRAs , and other investment accounts. Again, now is a good time to make that decision because the stock market is trading near records highs.
If those options don't cut it, retirees could consider tapping their home equity by downsizing. The median sales price for U.S. homes climbed to a record $419,300 in May 2024, according to the National Association of Realtors. In other words, housing prices are still running hot.
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